Tuesday, December 18, 2007

Big Drop in Mutual Funds Today?

If you're like me, you might have had a near heart-attack today if you looked at some of your mutual funds. I have shares in the Icon Energy Fund (ICENX), which has done very nicely for me. But today, it was down over 25% from yesterday!! What the heck happened?
I suspected it might have something to do with dividends being distributed, and I think that is probably right: Jonathan of My Money Blog came to the rescue with a reassuring explanation on his site today:

Check your brokerage account, and saw some huge 10-20% losses today? Not to worry, most likely this is due to your mutual distributing either capital gains and/or dividends for 2007. Mutual funds are baskets of stocks, so just like with stocks, they can create capital gains when they sell holdings for a profit. By law, mutual fund companies must distribute 90 percent of realized capital gains and dividends each year, and ’tis the season for passing these out.

While your fund’s net asset value (NAV) will drop, you’ll get an equivalent amount of cash in your account soon. Say your NAV is $10 and they make a $3 distribution - you’ll end up with $7 in NAV and $3 in cash. If you have it set to automatically reinvest, then that cash will go back and buy more shares. If you hold them in a taxable account, this means you’ll have to pay the appropriate taxes on these gains next year. If they are in a sheltered account like an IRA/401k, then this really means nothing to you.

Thanks Jonathan!

2 comments:

Jonathan said...

No problem :)

Looks like your fund had a pretty good year!

Jonathan said...

Just a note: ICENX declared a capital gains distribution of $9.67220, effective on 12/17/2007.